Dividend Value Traps
AuthorDavid Fourie Stephens
Dividend investing can be a great form of investing as highlighted in the video below. However, investing in companies that cut their dividend can be a very risky long term investment strategy.
Let's look at the following example:
Company A is priced at R100 and pays a R8 dividend which implies a 8% dividend yield. Company B is priced at R100 and pays a R4 dividend which implies a 4% dividend yield. Which one is better?
If you know the following would you still choose Company A?
Company A had a share price of R300 in 2021 and a dividend of R12 implying a 4% yield, the same as Company B. The price dropped two thirds and the company cut its dividend from R12 to R8, however, due to the severe price drop the dividend is now 8%. So be aware of just looking at the dividend yield and thinking that the company's share price is cheap and a good investment.
Watch the following video to learn how to identify potential dividend traps.